In this article, we consider the impact of fiscal decentralization on government quality by way of disaggregated measures of the former. Specifically, we break down fiscal decentralization into sub-central expenditure on public procurement and compensation of public sector employees. We find that decentralizing public procurement is bad for government performance while the decentralization of public sector wages improves governance. We relate the negative effect to the rent-seeking activity of interest groups and the positive effect to the informational advantage of sub-central provision. Moreover, we explore the impact of the Great Recession on our results and find that it is associated with stronger negative and positive effects of decentralization on governance, something which is consistent with the observed increased in the degree of decentralization since 2007.
Kyriacou, Andreas P. and Roca-Sagalés, Oriol, "Decentralization and Governance in Europe:
Evidence from Different Expenditure
Components" (2018). ICEPP Working Papers. 166.